By Mike Myatt, Chief Strategy Officer, N2growth
With this week’s negative market activity I have had several inquiries asking for my opinion on the direction of the stock market. Let me begin by saying that I’m not a stock picker or market prognosticator, but rather I tend to look at macro and micro economic drivers to make general observations which some have found of benefit over the years. In today’s post I’ll note some of my recent observations which I hope will be of some use. That being said, it is my strongest recommendation that before making any changes in your portfolio that you seek the counsel of a qualified financial advisor. On with my thoughts…
It should be noted that US financial markets have seen a very robust run over the past few years. Just this last week, the Dow reached all time high’s breaking the 14,000 mark. Now this week things appear to have reversed themselves as we have seen a fairly strong regression with back-to-back-to-back market losses, and what could easily be a week in which the Dow falls in excess of 600 points (let’s see what happens tomorrow). So the question I’m getting is this; what is going on and what should I make of this? The answers to this question are varied and complex, and to do the topic justice would require more attention than I normally give in the space of a blog post. So rather than provide a long narrative commentary, or an incomplete analysis, I have chosen to highlight the following 6 observations for your consideration:
- A Sign of the Times: Many may want to debate and argue about the overall direction of the market, but one thing I’m fairly certain of is that the markets will be very choppy in the coming weeks and months. My personal opinion is that the market may have topped for now, and that we may in fact be moving into a strong bear trend. Given the worsening economy, it wouldn’t shock me to see a sub 7000 Dow in the coming year. Several economic reports are due out next week as well as a number of major companies announcing performance. It wouldn’t shock me in the slightest that we see foreclosure numbers come in in excess of 50% above where they were last year at this time. If you don’t have the stomach to ride out what is certain to be a period heavy volitility then you may want to consider rethinking your investment strategies…
- Market Makeup: Stock indexes are made up of a number of different issues across sectors, and as such, are heavily influenced by industry performance. As an example, while the NASDAQ is off sharply today breaking a key technical barrier by dipping below its 50 day moving average, the news may not be as bad as it looks if you dig a bit deeper. If you view NASDAQ performance by contrasting various industry trends you’ll see that the financial, transportation, and energy sectors are weak while technology stocks are actually doing well. If you look at the NASDAQ 100 it is not even close to falling below its 50 day moving average. This is because it is being underpinned by the strong performance of the technology market and their independence from credit markets. Pay attention to industry and sector analysis more than individual performance if you are investing in funds or indexes. That being said, take note of the caution expressed above about the overall direction I believe we’re moving in. With what I believe lies ahead, it will be difficult to hold any major support levels over the mid to long term.
- Trouble Spots: Amid ongoing concerns in the Mid-East, increasing oil and petroleum pricing (I believe the last few weeks price decline at the pumps is a temporary reprieve), increased commodity (materials) costs, poor transportation earnings, and a number of other key indicators, I am not particularly bullish on transportation or construction sectors over the short run. While there is still tremendous liquidity in financial markets, I have growing concerns that we are in the very early stages of a credit crisis that when all is said and done may make the credit crunch of the late 80′s look like a cake walk (does anyone remember the RTC?). With aggressive lending and investment policies over recent years now coming back to haunt financial institutions (and I’m not just talking about the sub-prime market) we may see a strong risk re-pricing. It is likely that rating agencies will strongly adjust lending guidelines in the coming months which will affect the makeup of pools and liquidity in secondary markets. We may also well see the pace of LBOs (at least at the top end) slow and the frothy pace at which hedge funds and private equity firms have been investing may taper-off as well. With the dollar still being crushed globally, resting against all time lows against the Euro and the poor performance in financials described above, I’m worried about consumer confidence and its trickle down on retail spending such that I also have short-term concerns about consumer stocks. Many of the same metrics tend to give me pause on manufacturing plays as well.
- Think Quality: Today is definitely reflective of a sellers market as we are seeing a strong rotation based upon a flight to quality. Money is moving into Technology, Pharmaceuticals, Bonds, and other issues perceived to be more stable investments. Don’t get me wrong; volatile markets can be great opportunities for speculators not adverse to risk, but for those that don’t fall into that category I would suggest taking safe harbor over the short-term.
- Think Long-Term: I’m not a day-trader, and I don’t view the stock market as a short-term play. If you are a long-term investor sufficiently diversified you will eventually ride-out the ebbs and flows of market volatility and see better days again in the future. If you’re attempting to pick short-term stock or market movement in today’s environment you will likely find yourself getting whipsawed by unexpected rapid moves that may seem to defy conventional technical or fundamental analysis. That being said, why sit and watch your portfolio take hits if you don’t have to…My personal belief is that playing the down-side or a move to cash would be the best thing for investors at this time.
- Think Globally: US financial markets are not what they used to be. The US economic impact on the global economy is shrinking on an annual basis. If you want to maximize portfolio returns, both stronger markets and emerging markets must be incorporated into your investment philosophy.
The above commentary may sound a bit bearish in nature because it is…It is a wake-up call for caution and prudence. My personal opinion is that we are headed for a recession, and as I noted above, a massive retraction in the equity markets, and a capital and credit crisis the likes of which this country has not experienced. Remember that what goes up, must also come down. All investments contain risk, and the trick therefore is to not only understand the risks, but to align your investments with your risk tolerance relative to the returns you’re willing to accept. While the above commentary is a somewhat high-level and rudimentary analysis consisting of little more than a top of mind brain dump of current market conditions, I nonetheless hope that it will provide some value when formulating your thoughts. Remember to seek the counsel of a savvy investment professional prior to making any extreme changes in your portfolio and best wishes for continued investment success.
